BTR vs BTL. What’s the real difference?

Date: April 5, 2018

Author: urbanbubble

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A lot has changed in the last three years since I hosted an event at MIPIM which focused on a citywide survey in Manchester and Salford, outlining what residents wanted and would pay for in the new wave of PRS developments. We’ve gone from the moans and groans of planning, funding and construction costs to having over 11,000 homes in development regionally. 2017 broke the construction levels of 2016, which in turn beat the 2006/7 boom pre-recession.

Massive strides have been taken since 2014/15. In that time, we’ve all become acquainted with the most popular property acronym, PRS, but now we hear a new one – BTR, short for Build-to-Rent. So, what does it mean? Is it different to PRS? Is the industry just getting a little snobby, or will it represent something truly different?

MORE THAN A NEW ACRONYM

Build-to-Rent is the term used for the residential schemes being designed, built and managed specifically for rent, whilst PRS (Private Rented Sector) is the catch-all for all rented homes, including Buy-to-Let (BTL).

Yet the term requires further drilling down. Plenty of developers have created schemes that are ‘designed, built and managed for rent’ but then sold, often across the globe, to BTL investors. The real difference in BTR is the singular ownership: the investor purchases the entire residential asset and a single operator manages it on their behalf.

Many schemes claim to be BTR (designed and built specifically to rent), but have fractional ownership and are, as such, governed by leasehold law. Those that are singularly owned are typically schemes purchased by the institutional funds we’ve all been so keen to see enter the market. Now, they are doing so in a big way.

It’s silly to make a sweeping statement that institutional or singular ownership rental schemes (true BTR) are ‘better’ than fractional ownership (BTL) ones – not least as we’re appointed to some of the North West’s top developers! However, there are key differences which impact the quality of real estate and service delivered to residents.

A DIFFERENT WAY OF THINKING

Institutions have an immense amount of firepower, knowledge and experience in real estate – already holding billions of pounds’ worth of property. They forward-fund schemes and commit significant resources to ensure the final product is ‘leading’ for the city. The residential scheme is thought of as a community, with a brand created for the target demographic, and the quality of build, materials and fit-out suitable for a long-term hold of 15 years and beyond.

This has had a remarkable impact on the developer community in Manchester. Residential schemes are being sold on the open market for BTL. Where once they would have had nothing more than lift lobbies and bin stores, these units now come with the same amenities, facilities, and on-site services that the BTR sector is delivering. However, if the management of this community is fractional, across half a dozen letting agents and a block manager, the ongoing upkeep of the property and service to residents will fall behind its BTR equivalent very quickly.

RUNNING COSTS: SERVICE CHARGES AND OPERATING EXPENSES (OPEX)

A BTR scheme runs on an operating and capital expenditure forecast over the long term (we plan 15 years past stabilisation). A BTL scheme has a freeholder typically collecting ground rents, a managing agent running the communal aspects of the development with service charges, and several agents leasing the apartments on behalf of landlords.

In Manchester, adding up all the fees of a freeholder, managing agent and letting agent, the costs charged to an owner of a 2-bed apartment sit around £2.3k per annum. For a 400-unit scheme, that’s around £920k a year in management fees alone. BTR fees would be considerably less for a scheme of the same size; we’ve found, across all spend areas, that running a BTR scheme is significantly more efficient than BTL.

DELIVERING EXCELLENT SERVICE FOR OUR CUSTOMERS

urbanbubble have always seen our tenants as customers. The industry is now in agreement: we have to deliver the best resident experience to maximise appeal and rents, whilst reducing resident attrition. A singular owner, with a singular operator, working on a cost-efficient scheme can invest in long-term staffing as the largest proportional cost in the OPEX. By contrast, BTL schemes face pressures on the £-per-square-foot service charge by owners wishing to maximise returns – often compromising the on-site facilities team.

Letting agents compete to fill vacant units as the negotiators are rewarded on ‘tenant find’. They often undercut one another on rents, which can reduce the investment return the landlord could receive. There are also no resources provided by the letting agent to provide day-to-day resident care and service (unlike BTR, where we provide a whole team, on-site, dedicated to Resident and Leasing Services).

This article is not meant to underplay new BTL schemes – we have some amazing developments being launched in Manchester and Liverpool that will out-compete some of their BTR rivals. However, this is only possible if a singular operator or management approach is taken.

BTR is different. It has arrived in a big way, already redefining the residential rental market. We know that it will continue to have a profound effect over the coming decade.